Page 204 - THE MARKET WHISPERER

200 PART 7 - Indicators: The Trader’s Compass

stock is dropping due to lack of demand, which does not enable sellers
to sell. At a more advanced stage when the stock continues falling, fear
takes over. The public is beset by panic, and volume increases when sellers
begin vying for demand, selling aggressively at any asking price. On the
other hand, this is also the stage when some institutional traders begin
accumulating the stock again.

Generally, three to five days before a stock falls, when the volume
grows, the stock will find support and possibly even return to a high. Price
correction with small volume chiefly indicates that “flea market players”
have joined the short-term trade, seeking bargains. Usually they will fail,
as the stock will usually continue to trend down, but this never prevents
them from bragging about their amazing success. I meet such players
frequently at conferences where I lecture. They always boast of the latest
stock they bought. It sounds something like this: “I just bought Citigroup
when it was at $2 and now it’s at $11.” Almost always, they recall their rare
successes rather than their multiple failures. They conveniently forget that
they also bought Lehman Bros. at $3 and discovered the next day that it
had dropped to zero, just as happened to any number of other trades they
executed, all of which lead to the eventual closure of their trading account.

How to Interpret Large Volume without Any Price
Movement

Large volume without any significant price movement can come about
from an institutional trader’s demand. The decision-making processes of
institutional traders are very different from those of day traders or private
investors. Institutional traders will give some weeks, if not months, of
consideration to buying a stock. During that time period, they conduct an
in-depth economic study, known as fundamental research, on the company
and its products, its financial reports, its market status, and much more. As
institutional traders manage huge sums of money, they need to purchase
extremely large quantities of stocks, typically in the hundreds of thousands
if not millions of shares, in order to “move money.” That kind of quantity,
if bought in the market from random sellers, will create high demand and
cause price spikes before the fund has managed to collect the required
amount.

The solution is arrived at through several avenues. First of all, the fund
will try to locate sellers holding large quantities and buy them direct in
“out of exchange” transactions. These usually cover hundreds of thousands